Comment: Economic policy: how they got it wrong

by Prof Rod Jensen

News Weekly, December 15, 2001

Professor Rod Jensen, from the School of Economics at the University of Queensland, explores the reasons why economic rationalism has failed.

John Maynard Keynes, the well known economist, pointed out that in the long run, it is not vested interests which count, it is ideas and ideology which have the most influence on our lives and which decide our destinies.

Witness to this claim are the effects of Keynes’ own theories of economics, the influence of Marx on the world, and of course the immense influence of Christ and his teachings.

This brief article points out that current economic policy, especially economic rationalism, is basically ideologically driven, is based on a faulty ideology, but has immense influences on our lives, many of which ignore basic ideas of equity or fairness.

If we were discussing health, defence or social security policy, we would all as citizens feel free to hold an opinion and to debate the issues.

The average citizen, however, avoids giving an opinion on economic policy (in the mistaken belief that only trained economists have the background to form a sound opinion), and basically leaves economic questions to the economists and the bureaucrats.

The result is that economic policy is formed mostly by technocrats, and misses the common touch of those most affected by these policies, and questions of equity are often ignored.

Economic policy should be a means to an end, with the end being the values of society. Economic advice should be objective, avoiding ideology and seeking the best way to achieve the ends of society as a whole.

Instead, economic policy has been in recent years based on an ideology which we call economic rationalism, with no pretence of objectivity, but advocating the ideological stance of market fundamentalism.

So what is economic rationalism - a term, incidentally, which is almost peculiarly Australian? Economic rationalism (ER) is basically a belief, or an article of faith, that the markets - unhindered and unregulated - are the best way to operate the economy and will produce the best outcomes for the nation as a whole.

In the context of the inevitable trade-off between economic efficiency and equity, ER is based on the belief that equity and fairness is a minor argument when compared to the benefits of improved efficiency.

ER in Australia has been institutionalised through National Competition Policy (NCP), agreed between the Commonwealth and the States with some financial inducements, and operated in a manner quite different from the original concept, largely by unelected officials with the power to make economic decisions which would make the average politician tremble.

The theory goes this way. Increasing competition is a benefit to the economy, and if any restriction/regulation is to be retained, it is first necessary to demonstrate a net benefit to the community as a whole through a public benefits test which weighs up the positive and negative effects of the proposed deregulation in terms of efficiency gains, ecological sustainability, social welfare, equity (fairness), health and safety, regional/local impacts, interests of consumers, and so on.

The argument is that deregulation should occur if the efficiency gains are greater than the negative effects, including local effects. In practice, the public benefits test has been seldom applied when deregulation decisions have been taken, and most of the criteria have simply been ignored.

The major flaw of NCP is that it shows no understanding of the real nature of competition, and treats competition as a generic and uniform concept. We can take two quite different examples, remembering that the very nature of competition ensures that there will be both winners and losers in a competitive process, that there is no competition in which all are winners, despite the rhetoric which seems to fly loosely around the nation.

The first is the example where the players in the game are large corporations of roughly equal market power and staying power. In this case we can see the very substantial benefits or efficiency gains from competition in reduced airfares, telephone costs and so on.

The second example is where (as in the dairy industry for example) there are a small number of large corporations (processors/retailers) with immense market power, and a large number of relatively small players (farmers), each with no effective market powers. It is obvious, even to the often-quoted Blind Freddy, who will be the winners and the losers in this case.

The dairy industry is now firmly in the hands of the processors and retailers, and many farmers have suffered losses in income and capital, without full compensation for this decision, all in the name of an ideology, which is not supported by the majority of economists and not even by modern economic theory.

This loss of income for many farmers means families in stress, communities with reduced economic base, employment and income flow-on effects - those effects which just are not considered important by the market fundamentalists.

The obsession with market fundamentalism or deregulation has, of course, determined our international trade policies for many years, leading to the premature and unmanaged trade liberalisation of the economy, apparently in the touching belief that other countries will follow the naïve self-sacrifice of Australia in trade matters. This liberalisation was, apparently, based on the conclusion that since most (assumed to be usually about 80 per cent) of our agriculture output was exported, we needed to ensure access to overseas markets by sacrificing Australian industry.

Recent research, initiated by the work of Dr Mark McGovern, has established that most of Australia’s agricultural product is, in fact, consumed within Australia, thus weakening considerably the case for excessive trade liberalisation. This evidence appears to have been effectively ignored by officials and ministers responsible for trade matters.

Why did this happen?

When we consider the plight of the dairy industry, and other industries in similar positions, we need to ask some very basic and very important questions. Questions like - how did we get here to this bad result?

The answer is: a combination of the force of ideas, bad ideas, a bad concept of the effects of competition, acceptance of NCP by some farmers groups without sufficient attention to the inevitable results, bad international trade policy, politicians who took the easy way out and were allowed to do so, farmers who trusted government to look after them, and a lack of public debate on these issues.

An overseas economist friend, observing the situation of the dairy industry in Australia, asked a number of questions:

Why did it happen? Response - so we would all be better off! Who is better off? Response - the processors and the large supermarket chains!

Why did we let it happen? Response - bad ideas dressed up as good ideas!

Why did the governments allow it to happen? Response - the minders told them to!

Why didn’t the farmers unite? Response - it is illegal for them to do so - it is described as anti-competitive behaviour (a description supported incidentally by the National Farmers Federation)! His final comment - "seems pretty stupid to me!" Amen.

We should be reminded that this is primarily not an economic issue, but a major social question - one of social justice. How do we value the social implications of wholesale and mindless deregulation and social distress, against the ideological values of bureaucrats who continue to convince ministers (in the best Sir Humphrey-style) that all the minister has to do is continue to say we will all be better off at some vague time in the future?

So we blunder on in Alice-in-Wonderland style with economic policies which ignore their important social consequences, particularly at the local level, with people hurting and simply being ignored as all levels of government wash their hands on the issues.

It is not difficult to imagine how history will judge this period, long after it is too late to correct the situation.